823.51/1204

The Under Secretary of State (Welles) to the Peruvian Ambassador (Freyre)

My Dear Mr. Ambassador: I wish to thank you for your kindness in writing to me on February 25, last, and summarizing, at the request of Dr. Concha, the position of the Peruvian Government concerning the servicing of the Peruvian dollar bonds.

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In giving the contents of your letter the careful study and consideration which they demand, I have been particularly impressed by the manifestations of the friendly attitude of the Peruvian Government towards the United States mentioned in the concluding paragraph of your letter. It is, of course, unnecessary for me to attempt to say to you how much these evidences of close friendship have been appreciated in this country; nor do I think that it is necessary for me to mention the various ways in which this Government has in the recent past attempted to show its feeling of warm friendship towards Peru, as for example, the measures adopted by this Government several months ago to increase the amounts of sugar that might be imported from Peru, notwithstanding the strong opposition of American interests which regarded themselves as adversely affected.

With respect to the debt question, a large proportion of the outstanding Peruvian dollar bonds are held by persons of small means in the United States, many of them widows and aged persons who, relying upon the good faith of the Peruvian Government to honor the obligations which it solemnly assumed, placed their savings and limited capital in Peruvian bonds. The Department receives frequent letters from such bondholders, and it appears that a large number of these persons have been placed in distressing circumstances the last several years owing to the default of the obligations on which they had relied with such confidence. These persons are not unsympathetic with the desire of the Peruvian Government to increase its public works and to make increased appropriations for social reforms and other purposes, but it is difficult for them to perceive the logic of any claim that the Peruvian Government is prevented by economic circumstances from making interest payments of more than approximately one-half of one percent on its external obligations while paying full contractual interest on its internal bonds, excepting a reduced rate from eight to six percent in the case of one issue, and while making unprecedented outlays for certain other purposes. The same persons recall that the 1938 budget is the largest in the country’s history, being even larger than in the years before the depression when the Peruvian Government contracted the existing loans and when it was making full service payments, and they are impressed with reports reaching the United States that the year 1937 was one of the most prosperous years experienced in the commercial relations of Peru.

I can say definitely that the American holders of Peruvian bonds have had no desire to be grasping or unreasonable creditors, and during the period of the unprecedented world economic depression when many governments were obliged by circumstances beyond their control to curtail their budgets substantially, they were disposed, I should say, to take this factor into consideration and to forego the [Page 880] full amounts which the Peruvian Government had agreed to pay to them. Their present feeling, however, is that while there are undoubtedly many opportunities for useful expenditures for public works and other constructive purposes in Peru, as in most other countries of the world, Peru’s needs for these purposes are probably no greater now than they were in 1929 and 1930, particularly since much progress in this field has been already made during the administration of President Benavides, and these persons feel that in the last analysis they are being called upon to meet such outlays. They feel also, perhaps not without logic, that the debts of a Government are not altogether unlike the debts of an individual, and that although an individual is often mindful of things which he would like to purchase and which would be of considerable value to him, increasing perhaps his productive efficiency, he usually arranges his personal affairs in order to give any contracted debt payments priority over such other expenditures as can possibly be dispensed with. That of course is the basis upon which the entire credit structure is based, for otherwise there could be no confidence such as to induce persons with savings to invest them in loans.

There is no question of the value of the action already taken by the Peruvian Government formally to acknowledge the validity of its contractual obligations and to make a small offer on the service of the loans as evidence of the Government’s good faith and intentions. Nevertheless, it is my firm conviction that an offer at this time by the Peruvian Government to the American bondholders commensurate with Peru’s economic resources would be of the greatest value in fortifying and increasing the feeling of good will in the United States towards Peru.

I am communicating the aforementioned observations to you in the spirit of candor that has always characterized our very pleasant personal relationship and with the hope that they may be of some assistance in clarifying this situation which I consider to be of such importance in the cordial relations between the two countries.

With all good wishes [etc.]

Sumner Welles